Is AksharChem (India) (NSE:AKSHARCHEM) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, AksharChem (India) Limited (NSE:AKSHARCHEM) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for AksharChem (India)

What Is AksharChem (India)'s Debt?

You can click the graphic below for the historical numbers, but it shows that AksharChem (India) had ₹246.3m of debt in March 2023, down from ₹502.7m, one year before. However, it does have ₹17.4m in cash offsetting this, leading to net debt of about ₹228.9m.

How Strong Is AksharChem (India)'s Balance Sheet?

According to the last reported balance sheet, AksharChem (India) had liabilities of ₹519.7m due within 12 months, and liabilities of ₹349.2m due beyond 12 months. Offsetting these obligations, it had cash of ₹17.4m as well as receivables valued at ₹364.3m due within 12 months. So it has liabilities totalling ₹487.1m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since AksharChem (India) has a market capitalization of ₹1.89b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is AksharChem (India)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, AksharChem (India) made a loss at the EBIT level, and saw its revenue drop to ₹2.9b, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

Not only did AksharChem (India)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹45m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₹78m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for AksharChem (India) (of which 1 can't be ignored!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.